The euro area economy is continuing to recover and the labour market is improving further, helped by ample policy support. But growth is likely to remain subdued in the first quarter of 2022, as the current pandemic wave is still weighing on economic activity. Shortages of materials, equipment and labour continue to hold back output in some industries. High energy costs are hurting incomes of euro area households and earnings of firms and are likely to dampen spending. However, the economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up again strongly in the course of the year.
Inflation has risen sharply in recent months and further surprised to the upside in January. This is primarily being driven by higher energy costs that are pushing up prices of goods and services across many sectors, as well as by higher food prices. Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year.
The Governing Council therefore confirmed the decisions taken at its monetary policy meeting last December. Accordingly, the Governing Council will continue reducing the pace of its asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March. In view of the current uncertainty, the Governing Council needs more than ever to maintain flexibility and optionality in the conduct of monetary policy. The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at the ECB’s 2% target over the medium term.
